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Lunding v. N.Y. Tax Appeals Tribunal, 89 N.Y.2d 283 (Dec. 18, 1996).





Petitioners Christopher and Barbara Lunding challenged the constitutionality of N.Y. Tax Law § 631(b)(6) (McKinney 1987 & Supp. 1997), which denies nonresidents personal deductions for alimony from their New York State income tax liability. The Lundings took a full deduction for alimony payments on their 1990 New York income tax. The Department of Taxation and Finance disallowed the deduction, recalculated the Lundings' liability, and issued a Notice of Deficiency.

Petitioners sought administrative relief from the Tax Appeals Tribunal, which upheld the disallowance. The Administrative Law Judge noted that the Tribunal lacked authority over constitutional issues. Petitioners then sought relief from the Appellate Division who declared the statute in violation of the Privileges and Immunities Clause of the United States Constitution. The Court of Appeals now reverses.


Whether a state income tax statute that denies nonresidents a full personal deduction for alimony survives Privileges and Immunities scrutiny.


Yes. It survives because residents must pay income tax on their worldwide income while nonresidents pay only on their New York income. Additionally, nonresidents' alimony payments are wholly linked to activities outside the State.


Cases Cited by the Court

Other Sources Cited by the Court


State of the Law Before Lunding

The United States Supreme Court has interpreted the Privileges and Immunities Clause as guaranteeing that a nonresident doing business in a state is allowed to do so on terms substantially equal to that of a resident. Supreme Court of New Hampshire v. Piper, 470 U.S. 274, 279-280 (1985); Toomer v. Witsell, 334 U.S. 385, 396 (1948). This interpretation was used by the Court to declare a New Hampshire tax statute unconstitutional. Austin v. New Hampshire, 420 U.S. 656 (1975) (holding statute that taxes exclusively income of nonresidents and is not offset, even approximately, by taxes on residents alone, places too onerous a burden on nonresidents in violation of the Privileges and Immunities Clause).

The United States Supreme Court has upheld statutes that limit deductions of nonresidents when there is sufficient justification and the burden on the nonresident is not too onerous. These decisions establish a general framework for state decisions regarding nonresident personal deduction allowances. Shaffer v. Carter, 252 U.S. 37, 56 (1920) (upholding an Oklahoma law taxing nonresidents' income from local property and limiting deductions to losses related to in-state activities); Travis v. Yale and Towne Mfg. Co., 252 U.S. 60, 73 (1920) (upholding a New York law limiting nonresident's deductions to those connected with in-state income).

The Court of Appeals chose not to address a Privileges and Immunities Clause challenge to N.Y. Tax Law § 635(c)(1), repealed by the Tax Reform and Reduction Act of 1987, ch. 28, § 77, which preceded the statute challenged in the instant case. Friedsam v. State Tax Comm'n, 470 N.Y.S.2d 848 (3d Dept. 1983), aff'd 64 N.Y.2d 76 (N.Y. 1984). That section, under facts similar to the instant case, denied a nonresident the income tax adjustment for alimony paid to his nonresident ex-spouse. The Court of Appeals affirmed the lower court in Friedsam on statutory grounds without addressing the constitutional issue.

This is the first time the Court of Appeals has considered a Privileges and Immunities challenge to N.Y. Tax Law § 631(b)(6) since the New York legislature enacted the Tax Reform and Reduction Act of 1987.

Effect of Lunding on Current Law

Lunding affirms the constitutionality of N.Y. Tax Law § 631(b)(6). Nonresidents can be prohibited from taking a full deduction for alimony payments from their New York State income tax liability. In effect, Lunding puts to rest the challenge that the statute violates the Privileges and Immunities Clause. While the Clause guarantees that nonresidents doing business in a state will be similarly treated as residents of that state, the Clause does not call for complete equality. "[T]he Clause is not violated here '(i) there is a substantial reason for the difference in treatment; and (ii) the discrimination practiced against nonresidents bears a substantial relationship to the State's objective.'" Id. at para. 17. (citing Supreme Court of New Hampshire v. Piper, 470 U.S. 274, 284 (1985)). Therefore, a tax provision is constitutional when it is consistent with these two prongs.

In the first half of the test, the substantial reason prong, the Court distinguishes nonresidents from residents by noting that nonresidents are only taxed on income earned in New York while residents are taxed on their worldwide income. Nonresidents' tax rate is calculated as though they are a resident of New York. Although the nonresidents' marginal rate is based on their worldwide income, the nonresidents are taxed only on income derived from New York sources. Due to this difference, it is constitutionally appropriate that nonresidents do not enjoy a full alimony deduction from their New York income tax.

In the second half of the test, the substantial relationship prong, the Court begins by dismissing petitioner's claim that the legislative history of the statute is silent regarding the objective for treating nonresidents differently from residents. The court explains that where the statute's purpose is clear on its face, "absence of a statement at the time of enactment will not invalidate the statute." Lunding at para. 24. The Court then recognizes that the statute's objective is to tax income earned in New York and to allow deductions only for expenditures related to that income. Because alimony payments are "wholly linked to personal activities outside the State," the disallowance is within the statute's objective to prohibit such payments from being deducted from nonresidents' New York State income tax liability. Id. at para. 23.

The Court rejects petitioner's Equal Protection and Commerce Clause claims by quickly stating that the disparity in tax treatment is rationally related to a legitimate state interest.

Unanswered Questions

The court notes that "[t]here is nothing to warrant the petitioner's shifting the allowance for these expenditures, which are intimately connected with the State of his residence, to New York State.'" Lunding at para. 19 (citing Goodwin at 701). The court does not indicate the circumstances under which a nonresident's expenditures would become sufficiently connected to New York so as to justify shifting the allowance for deductions. For example, if Lunding's former spouse lived in New York, could Lunding then deduct his alimony payments? What if she lived in New York, and Lunding lived there while married to her? Similarly, if Goodwin's hospital or his life insurance company were in New York, could he have deducted these expenses from his New York state taxes?

The court also gives little guidance as to when similar status will pass the substantial relationship prong. The Lunding court notes approvingly Goodwin's three independently sufficient reasons to support the statute in question. (e.g.New York residents are taxed on their worldwide income regardless of source and are therefore entitled to the benefit of full deductions.) Lunding at para. 19 (citing Goodwin at 696-98). Arguably, allowing nonresidents to deduct personal expenses would not harm New Yorkers' entitlement to full deductions.

Survey of the Law in Other Jurisdictions

Decisions by other states applying these cases are largely in accord with Lunding. So long as the state limits the allowable deductions to those related to the nonresident's income derived from in-state sources, the statute is usually upheld.

The decisive factor in state decisions is the second prong of the standard Privileges and Immunities test: whether the state can articulate a substantial reason to justify the discrimination between resident and nonresident. The Supreme Judicial Court of Maine found a clearly sufficient state purpose in the goal of "'funding' no more than the share of tax benefits that is attributable to income earned within, and therefore taxable by, Maine." Barney v. State Tax Assessor, 490 A.2d 223, 225 (Me. 1985). See also Harris v. Comm'n of Revenue, 257 N.W. 2d 568 (Minn. 1977) (upholding the denial of deductions for moving expenses necessitated by employment outside the state; Minnesota has no power to tax income earned outside the state.); Spencer v. South Carolina Tax Comm'n, 316 S.E.2d 386 (S.C. 1984) (invalidating a statute that denied nonresidents non-business deductions unless their state of residence allowed apportionment of non-business deductions; the goal of encouraging sister state apportionment of non-business deductions was not a sufficiently substantial reason).

The Supreme Court of Oregon addressed this issue twice: Berry v. State Tax Comm'n, 397 P.2d 780 (Or. 1964); Wood v. Department of Revenue, 749 P.2d 1169 (Or. 1987). In Berry, the court upheld a statute denying deductions not related to income arising within the state. The court reasoned that the legislature may have concluded that personal deductions are so closely related to the state of residence that only that state should allow them. 397 P.2d at 782. However, in Wood, the court invalidated a statute which disallowed alimony deductions for nonresidents but permitted such deductions for residents. The court found no reason for the disparate treatment of residents and nonresidents, expressly rejecting the rationale that "the out-of-state character of the obligation and the plaintiff's residence justify such a distinction." Id. at 1171. The court suggested less restrictive means, such as allowing all federal adjustments to gross income except items of income, gain, loss, or deduction derived from non-Oregon source income. Id. at n.5.

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